Draft Revenue Laws Amendment Bill: public submissions

FINANCE PORTFOLIO COMMITTEE
19 October 2007
DRAFT REVENUE LAWS AMENDMENT BILL: PUBLIC SUBMISSIONS

Chairperson: Mr N Nene (ANC)

Documents handed out:
Business Parliamentary Office: Commentary by organised business on the Bill
Mallinicks Inc.: Comments on the Draft Bill
South African Institute of Intellectual Property Law: Submission on the Draft Bill
The Non-Profit Consortium: Submission on the Draft Bill

Relevant Documents
Revenue Laws Amendment Draft Bill, 2007

Audio recording of meeting

SUMMARY
The Committee heard four submissions from the public concerning the Draft Revenue Laws Amendment Bill. Many of the submissions echoed what the Committee had heard in previous hearings. Business Parliamentary Office and Mallinicks Attorneys’ main points focussed around the retrospective nature of some of the legislation, confusion around the classification of dividends concerning Capital Gains Tax (CGT) and Secondary Tax on Companies (STC), and specific anti-avoidance rules that impinged on genuine transactions. An as-yet unheard contribution concerning the deductions for environmental rehabilitation was also voiced. These contributions gave rise to several questions from Members, mainly around points of clarification. The presentation from the South African Institute for Intellectual Property Law highlighted the conflicts between the proposed Chapter XB and the existing legislation of the Counterfeit Goods Act of 1997. Finally, the Non-Profit consortium objected to the removal of Chapter 4(c) in the existing Bill, relating to the Skills Development Levy. There was little discussion on these points.

MINUTES
Submissions: Business Parliamentary Office (BPO) and Mallinicks Inc
Mr Abdul Patel, Parliamentary Liaison Officer, BPO, introduced the submission of the BPO. He explained that BPO had five main areas of concern on the draft Bill. These areas were Secondary Tax on Companies (SCT); Dividends; Intellectual Property (IP) regulations; Capital distributions and Environmental Deductions. He then handed over to Mr Des Kruger of Mallinicks to expand on the technical aspects of the submission.

Mr Des Kruger, Head of Tax: Mallinicks Inc, expanded more upon the five areas of concern of BPO. He submitted that the STC regulations were retrospective, and the business community had consistently opposed retrospective legislation. He urged the National Treasury (NT) to give clarity on the issue, and issue guidelines in writing informing people how to account for STC, as the proposed date of 1 October had passed.

With regard to dividends, Mallinicks and BPO could understand the intention of NT in the amendment of the definition of capital, but the way it was formulated was a new specific anti-avoidance rule that in fact affected genuine transactions too.

Thirdly, the BPO saw the new IP regulations as creating a disincentive for investment and Research and Development (R&D) in South Africa. There was an administrative concern around capital distribution, in that people did not know that what they received was in fact capital distribution and as such eligible for Capital Gains Tax (CGT). The BPO accepted the good basis for the provision, but were concerned that it may have possible retrospective implications.

Lastly, the deductions for environmental rehabilitation were welcomed, but budgeting 5% over a 20 year straight line for depreciation was unrealistic, as this infrastructure would not last that long. He asked the figure be increased to a realistic amount for depreciation of 10% over a 10 year period.
Mr Hennie Bester, Director: Mallinicks Inc, spoke to the written submission from Mallinicks, dated 8 October 2007. He supported all that had been said previously by his colleagues, but added a frustration that was experienced by lawyers when South African Revenue Services (SARS) would draft legislation on companies that did not properly reflect company law. This was seen in statements in the Explanatory Memorandum of the Draft Bill, and Mr Bester elaborated on this point. He again reiterated the strong opposition to the retrospective nature of the proposals, and appealed for consistency with regard to the definition and legislation of “dividends”. He concluded with a general observation on Intellectual Property (IP) asking that instead of a blanket ban on selling IP offshore, that the regulations should rather be aligned with the tax laws for those who wished to use IP for genuine international expansion. The rest of the submission was a repeat of what other groups had raised.

Mr Patel raised a correction on page 4 of the BPO submission. In point 2.1, the first line should have read “The deletion of prevention of pre-1993 profits”. He apologised for the error.

Discussion
The Chairperson commended the presenters on their concise inputs. He confirmed that their submissions were similar to what the Committee had heard from other players, especially concerning retrospectivity and declared dividend treatment. This would all make the work of SARS easier.

The Chairperson asked for clarification on the use of the words “retrospective” and “backdating” on page 4 of the BOP submission. In his mind they were the same thing.
 
Mr Kruger responded by explaining the use of “backdating”. There was draft legislation indicating changes from 1 October. He had requested in writing some directives from the National Treasury, back-dated to 1 October saying that the policies had changed. This was not retrospective, because when the drafting was done, it was anticipated as being in effect in the future.

Mr N Singh (IFP) found the comments on the deductions for environmental rehabilitation very interesting. However, he wanted to know why the submissions drew the line in identifying the new rate to be amended to 10%.

Mr Patel reminded the meeting that their submission was strongly informed by comments from the Chemical, Energy and Allied Workers Union. They tried to let the nature of the asset determine the depreciation. As important infrastructure and assets, 10% seemed a better amount.

Mr B Mnguni (ANC) also asked why an amount of 10% had been chosen, and not 20% or 15%.
 
Mr Kruger replied that the depreciation on capital items was determined by their lifespan. A pump in a reservoir would not endure for longer than 10 years, therefore 10% of its value each year would allow it to be written off in 10 years.

Mr Mnguni asked about the problem with retrospectivity. He wondered if the difficulty was that correcting the past would be too cumbersome or financially too expensive.

Mr Bester explained that, concerning the exclusion of profits of a capital nature, the problem was that prior to CGT companies sold assets and made capital. When they did that there was a specific exemption, which some companies used legally. Now that exemption, which they had budgeted with, was removed and in place there had been introduction of CGT and SCT . The companies might now be without the funds to pay the tax, or already have closed their books. Sometimes it was necessary to be retrospective, but this should be done only rarely and in special circumstances. Mr Bester said that the drafters and parliament in general shared the aversion to retrospective laws. The submission today was that making these laws retrospective was not justified in these circumstances.

Both Mr Mnguni and Ms J Fubbs (ANC) asked for clarity concerning the provisions relating to IP foreign control, and how they put the country at a disadvantage.

Mr S Marais (DA) also asked specifically about why these proposals would not be advantageous to foreign direct investment (FDI) in the country, as well as foreign companies already in South Africa.

Mr Bester answered that FDI attempts in South Africa found challenges with the IP provisions and the Treasury needed to look, for example, at why India and Korea were such high destinations for IP development. There was a concern, for example, when companies wanted to take trademarks out of the country. He would rather see similar exchange control with the tax legislation for IP than those in the Draft Bill.

Ms N Mokoto (ANC) asked for clarity around the problem of anti-avoidance laws affecting genuine transactions. She thought that all genuine transactions needed to be taxed, and wondered which transactions were deemed genuine and which were not.

Mr Kruger highlighted the example in the presentation where these specific anti-avoidance provisions attacked a genuine transaction. He said that they understood the mischief that was being done to avoid taxation, and the intent of the legislation, but here it caught genuine business people too. Section 90 of the Companies Act had allowed for unequal capital distribution from dividends to anyone, and they realised that this was a mechanism used to dispose of companies, and as such had corrected it. However, again it impinged on authentic transactions. Mr Kruger was of the view that there was too much hesitancy when it came to using the general anti-avoidance laws.

 Submissions: South African Institute of Intellectual Property Law
Ms Marilyn Krige, Partner: Adams & Adams, spoke on behalf of the South African Institute of Intellectual Property Law (SAIIPL), and gave a background to the Institute. The main contribution of the SAIIPL was in highlighting the conflicts between the proposed Chapter XB and the existing legislation of the Counterfeit Goods Act of 1997. There were various reasons of conflict, all of which would produce confusion and would work against the intention of the legislation. Two other problems dealt with were the lack of provision for time extension in replying to a query of authenticity, as well as the regulations concerning IP royalties and taxations that seemed to discourage the creation of IP in South Africa.

Discussion
Mr Marais noted that the presentation was interesting but incredibly technical. He wanted to know whether the import of motor cars fell under these regulations too. He asked as to who would be responsible to look for and detain counterfeit imports, and how many containers were detained for checking. He agreed with the need to protect the economy but also to protect the law-abiding importers.

Ms Krige replied that the onus was on the customs agents and that they only did a physical inspection on less than 2% of containers that arrived. They first looked for irregularities in the paperwork. Concerning cars, there had been instances of whole cars being counterfeit, but they normally dealt rather with parts and accessories.

Ms Fubbs noted the concerns surrounding the time factor in the processes needed to confirm authenticity of products and wondered if this was the core concern.

Ms Krige said that although the time factor was an important issue, they had learnt to deal with short time-frames. Now, however, the problem was the conflict between the two provisions that allocated different time frames. There was also no opportunity to get time extensions in the Draft Bill.

Ms Fubbs added another question concerning the IP regulations and wanted to know what the problem was with the proposed regulations.

Ms Krige briefly answered saying that the problem was that the incentive to develop IP in South Africa would not be present.

Submissions: Non-Profit Consortium
Mr Peter Hendricks, Attorney: Non-Profit Consortium, presented the submission of the Non-Profit Consortium. He highlighted corrections on page 2 of the document. There were two instances where the text referred to “section 4(d) of the Bill” and this should have read “section 4(c)”. The Consortium had an objection to the proposed deletion of paragraph (c) of Section 4 of Act 9 of 1999 as this removal of the exemption would have significant negative impacts on Public Benefit Organisations. He explained that there had been no real motivation as to the removal of this section given by SARS. Mr Hendricks proposed that the existing section 4(c) of the Act concerning the Skills Development Levy not be amended but rather retained in its existing format.

Discussion
There were no questions from the Committee. It was noted that the responses from National Treasury would be given on 24 October.

The meeting was adjourned.